Imperial Brands: Turnaround Unproven; 8.5% Yield Not Enough (Preview)

Company Update (IMB LN) (Neutral)

Summary

• Imperial Brands stock seems "cheap" on current multiples, with a P/E of 6.4x, a Free Cash Flow Yield of 14.3% and a Dividend Yield of 8.5%.

• However, as we search through H1 results for reasons to be more positive than our Neutral rating, we find only the same risks we saw before.

• H1 FY21 showed an 8% EBIT growth, but largely due to reduced Next Generation Products investment and U.S. mass market cigars.

• U.S. mass market cigar growth may not continue; Europe showed a decline in Tobacco profits; Australia and Asia are under pressure.

• The new Next Generation Products strategy remains unproven, as existing revenues are shrinking and we wait for new pilot trials.

Introduction

We review our Neutral rating on Imperial Brands (referred here as "IMB"), following H1 FY21 (ending March 31) results released on May 18.

We initiated our IMB coverage with a Neutral rating in July 2019. The share price has since fallen 17%, though including dividends investors would have been left roughly flat (up 0.…